The Wagner Daily


Despite the previous day’s rally and subsequent breakout above consolidation, the broad market failed to follow through to the upside. After beginning the day with a small opening gap down, the major indices slowly drifted lower throughout the day, which caused both the S&P 500 and Nasdaq Composite to close near their lows of the prior three days’ consolidation. The Dow Jones Industrial Average continued to show relative weakness and closed at a new low of the week. The S&P 500, Nasdaq Composite, and Dow Jones each closed approximately 1.1% lower yesterday, but volume dropped 12% in the Nasdaq and increased only 2% in the NYSE. This is positive because it means we did not see a broad-based day of distribution, which would have occurred if each of the major indices closed lower, but on higher volume. The main factor that prevented the broad market from rallying yesterday was major weakness in both the Pharmaceutical and Biotech sectors, which closed 2.6% and 3.6% lower respectively.

The Nasdaq Composite broke its seven-day winning streak yesterday, but a small correction should not have come as a surprise. It appears the 200-day moving average may be giving traders and investors a good excuse to sell, as the index closed back below the 200-day MA after closing above it for only one day. As we have mentioned numerous times in the past, an index rarely pushes through resistance of a 200-day MA on the first attempt, without at least some form of correction first. The daily chart below illustrates how the 200-day MA is acting as a limiting factor:

Because the Nasdaq sold off on lighter volume yesterday, we do not yet feel comfortable taking short positions in QQQ or Nasdaq-related sectors. The 200-day MA may simply give the Nasdaq reason to pause, but it is probably a safer bet to buy any pullback rather than attempting to short it.

Perhaps the most important thing to watch today is whether or not the S&P 500 is able to close the week above resistance of its weekly downtrend line, which began in March of 2004. Going into yesterday morning, the index was firmly above that downtrend line, but yesterday’s losses caused the index to close right on the trendline. Since today is the last day of the week, all eyes will be on the performance of the S&P. A higher close today would enable the index to have its first weekly close above the downtrend line since it began seven months ago, which would indeed be bullish. Conversely, a lower close would mean the weekly downtrend continues and the mid-week rally was just a probe above trendline resistance. We’ll take a fresh look at the weekly chart of the S&P 500 next week, after we see how it acts today.

As a final note, we took profits on our gold and silver mining stocks yesterday, which hit their trailing stops yesterday afternoon. While we always attempt to maximize profit through the use of trailing stops, yesterday’s closing action in the $XAU index was bearish and we feel the index could head lower in the short-term. We still maintain a bullish bias on the Gold/Silver Mining Index in the intermediate term, but will re-assess and look for a lower-risk re-entry point after we determine the extent of the short-term correction. As for the Home Construction stocks, we maintain a full short position in them.

Today’s watch list:

QQQ – Nasdaq 100 Index Tracking Stock

Trigger = 6 cents above the high of first 20 minutes
Target = 37.90 (resistance of prior high on weekly chart)

Stop = 36.04 (below yesterday’s low)

Notes = We view yesterday’s correction in the Nasdaq as an opportunity to enter a new long position, but notice we will only do so IF the Qs set a new high after the first 20 minutes of trading. If, however, QQQ fails to rally above its high of the first 20 minutes, we will not buy. Managing a trade entry in such a manner increases your odds of a profitable trade, as the direction after the first 30 minutes often sets the pace for remainder of the day.

Daily Reality Report:

Below is Morpheus Trading Group’s daily
performance report of closed trades and an update on all open positions from The
Wagner Daily (Intraday Real-Time Room trades are reported separately in The
Wagner Weekly). Net P/L figures are based on the quantity of shares represented
in the MTG Position Sizing Model.

Closed Positions:


Open Positions:

    SMH long (from Oct. 5) –
    bought 31.78, new stop 31.68, target 33.70, unrealized points = + 0.09, unrealized P/L = + $27


Note the new stop on SMH above, which was issued per intraday e-mail alert yesterday.

Edited by Deron Wagner,
MTG Founder and